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The end of the population pyramid (scheme)

Summary:
In a case of l’esprit de l’escalier, I just worked out the perfect parenthetical addition to this piece that was published in Inside Story, responding to a string of pro-natalist pieces in the New York Times and elsewhere. The central point is that the economic model in which strong young workers support elderly retirees is outdated and will only become more so. A sharp fall in births during 2020 has provoked a wave of handwringingabout the implications of an ageing population. The decline can’t be attributed solely to the pandemic, since most of the babies born in 2020 were conceived before the pandemic began. However, it appears to have accelerated as the impact of the pandemic has been felt. Some of the complaints reflect old-fashioned, not to say primitive, concerns about

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In a case of l’esprit de l’escalier, I just worked out the perfect parenthetical addition to this piece that was published in Inside Story, responding to a string of pro-natalist pieces in the New York Times and elsewhere. The central point is that the economic model in which strong young workers support elderly retirees is outdated and will only become more so.

A sharp fall in births during 2020 has provoked a wave of handwringingabout the implications of an ageing population. The decline can’t be attributed solely to the pandemic, since most of the babies born in 2020 were conceived before the pandemic began. However, it appears to have accelerated as the impact of the pandemic has been felt.

Some of the complaints reflect old-fashioned, not to say primitive, concerns about birth rates as an indicator of national ‘vitality’. But the main focus of concerns reflects a 20th century understanding of the economy that is deeply embedded in our ways of thinking and economic measurement, even though it is now almost completely obsolete.

The central assumption underlying these concerns is based on economic model in which “societies are organized around the notion that a surplus of young people will drive economies and help pay for the old”.

The model in which the young supported the old emerged in the 20th century, and ended with the 21st. For most of human history, old people were expected to work as long as they could, just as children were put to work as soon as they were able. The very young and the very old depended on their families to support them.

The welfare state which emerged at the end of the 19th century changed this radically. On the one hand, children were excluded from the workforce and required to attend school until the official leaving age, typically around 14. Governments paid for the schools, but, for the most part, required parents to support their children as in the past.

On the other hand, the introduction of old age pensions meant that old people (most commonly those over 65) were now entitled to public support, sometimes though not always, subject to a means test. Pensions were paid out of taxes or contributions to social security schemes. Either way, the cost was borne by the population of ‘working age’, defined as 15-64. With a high birth rate, the age distribution of the population appeared as a pyramid, with a large working age population supporting a small group of retirees.

The model underlying the desire for a population pyramid is one in which physical work predominates. Young and strong, needing only on-the-job training, workers leave school at 14 and immediately start contributing to the economy. By 65, they are worn out and ready for retirement. In this model, the more young people, the better.

To see that this assumption is problematic, we need only to look at US data on employment by age. At the turn of the century, the assumption described above looked reasonable enough. Around 60 per cent of young people aged 16-24 were employed compared to barely 30 per cent those aged 55 and over.

But by 2019, before the pandemic, the gap had mostly closed. Just over 50 per cent of people 16-24 were employed, compared to 39 per cent of those over 55. Many of the jobs held by young people are part-time and low-waged. By contrast, older workers are, on average, just below their peak lifetime earnings, reached around age 50.

Taking these facts into account, it seems likely that mean earnings per person are already higher for the old than for the young.

The reality of a modern economy is quite different from that underlying the population pyramic. To become a productive member of the community, young people need post-school education, whether academic or vocational. That implies a large expenditure of resources, which may be paid for by government, parents or through loan schemes like HECS. Taking all these together, the proportion of national income allocated to education is stable or increasing in developed countries like Australia and the US, even as the proportion of young people in the population declines.

https://www.acer.org/au/discover/article/three-charts-on-how-much-australia-spends-on-all-levels-of-education

https://ourworldindata.org/grapher/us-education-expenditure-as-share-of-gdp-public-and-private-institutions?country=~USA

A return to high birth rates over the next few years would imply the need for a large increase in education spending. The payoff in terms of a more productive workforce would not be fully realised until the second half of this century, when the expanded age cohort entered the prime-age workforce in their late twenties and early thirties.

At the other end of the age distribution, official retirement ages have been abolished, and the eligibility age for the pension has been pushed to 67, with further increases in prospect. There is still a substantial group of manual workers for whom physical exhaustion makes retirement a relief. Attitudes that under-value older workers are still prevalent, with the result that many are pushed into retirement whether they like it or not. But for a large group of white collar workers, working past 65 is an increasingly attractive economic option.

A realistic model of the future workforce is one in which productive workers are mostly aged between 25 and 70. It’s unlikely that life expectancy will ever be much above 95. On that basis the typical person will spend about half their life in the working age population and the other 50 years evenly divided between education and retirement.

In all of this, I’ve focused on the age distribution of the population. Despite the concerns that have been expressed, the age distribution associated with a lower birthrate is unlikely to cause major problem.

By contrast, the implications of a lower birth rate for the the size of the world’s population are unambiguously beneficial. The world is already overcrowded, and the needs of a growing population are straining the capacity of the planet to support us. Even with falling birth rates, the worlds population is certain to rise between now and 2050.

By 2100, population might return to the current level of eight billion or perhaps a little fewer. The idea that we should push people to have more children in order this number, rather than making marginal adjustments to the economic institutions we have inherited from the 20th century, is simply nonsensical.

John Quiggin
He is an Australian economist, a Professor and an Australian Research Council Laureate Fellow at the University of Queensland, and a former member of the Board of the Climate Change Authority of the Australian Government.

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